Indifference pricing and hedging in stochastic volatility models
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abstract
We apply the concepts of utility based pricing and hedging of derivatives in
stochastic volatility markets and introduce a new class of "reciprocal affine"
models for which the indifference price and optimal hedge portfolio for pure
volatility claims are efficiently computable. We obtain a general formula for
the market price of volatility risk in these models and calculate it explicitly
for the case of an exponential utility.
